By last October, one-third of UK households were estimated to be using the internet to buy goods and services.
It is anticipated that this will have a huge impact on the online financial services industry, which could be worth up to £50bn by 2005.
A host of financial service providers have sprung up on the web, eager to grab market share. These comprise both rebranded established providers, such as Co-op's Smile and Prudential's Egg, and independent start-ups such as First-E and iDealing.com.
Most of the web services target the consumer directly and many IFAs may feel threatened by this, fearing that the accessibility of the internet will erode their position as the first point of reference for investors.
However, IFAs should take care not to overlook the opportunities offered by the internet. Some of these, such as online broking, may be integrated seamlessly into existing offerings provided by the IFA.
Increasing numbers of IFAs are strengthening their presence on the web, recognising that it enables them to be accessible continuously to customers. Some IFAs have even established quasi-online trading services which enable their customers to deal shares through an email service. The request is emailed to the IFA/broker who then executes the trade.
However, the trend towards online broking – there are now around 303,000 online trading accounts – and, in particular, discount execution-only broking, is opening up opportunities for IFAs to broaden and improve the service they offer.
Execution-only brokers provide a simple service – they process trades. It is a service which complements rather than competes with the advisory service provided.
Although direct equity investment will account for an increasing percentage of individual portfolios, investors will never forsake alternative investment products completely. UK equity investments account for only 16.5 per cent of financial assets held by private individuals and, with bank deposits representing over 30 per cent, there is plenty of scope for growth. By working in partnership with an execution-only broker, the IFA is able to offer a wider range of services to clients while strengthening their position as the portal for all wealth management services.
Online execution-only brokers, as opposed to email or phone services, may offer the greatest advantages. For the investor, the online broker guarantees execution at the real-time displayed price. Furthermore, these services have tools which enable investors to track the value of their portfolio at any time. Such tools may be integrated easily into other wealth management monitoring services the IFA may offer Some IFAs may be reluctant to introduce clients to a service which is branded independently. Such IFAs should consider buying in a white-label service which can be rebranded under their own name. Brokers, whose income comes solely from processing trades, are likely to be interested in generating large volumes of transactions and providing such a white-label service to brokers with established brands and customer bases.
POINTS TO CONSIDER When CHoosing aN ONLINE BROKING partner
Branding – Do you want to work in partnership with an existing broker or would you rather work with a white-labelled product?
Charges – How much do you want clients to be charged for the service? Do you want to charge a flat fee or a percentage commission? Some services may price deals to accommodate your professional advice.
Portfolio tracking – Does the service enable you to keep track of how clients' investments are performing? Can the broker's system be easily integrated with any tools that you may already be using?
Availability of equities – How wide is the selection of shares available? Who are the market-makers used by the broker?
Transfer facilities –
How easy is it to transfer shares from accounts with other brokers? Is there an additional charge for this?
Interest rate – What rate of interest does the broker pay on cash balances in the account?
Technology – How reliable is the technology behind the broker? Does the broker have direct control over its systems or does it use a vendor product or an outsourced solution?
Security – How secure are the broker's systems?